# Question

Randy Harris, controller, has been given the charge to implement an advanced cost management system. As part of this process, he needs to identify activity drivers for the activities of the firm. During the past four months, Randy has spent considerable effort identifying activities, their associated costs, and possible drivers for the activities’ costs.

Initially, Randy made his selections based on his own judgment using his experience and input from employees who perform the activities. Later, he used regression analysis to confirm his judgment. Randy prefers to use one driver per activity, provided that an R2 of at least 80 percent can be produced. Otherwise, multiple drivers will be used, based on evidence provided by multiple regression analysis. For example, the activity of inspecting finished goods produced an R2 of less than 80 percent for any single activity driver. Randy believes, however, that a satisfactory cost formula can be developed using two activity drivers: the number of batches and the number of inspection hours. Data collected for a 14-month period are as follows:

Required:

1. Calculate the cost formula for inspection costs using the two drivers, inspection hours and number of batches. Are both activity drivers useful? What does the R2 indicate about the formula?

2. Using the formula developed in Requirement 1, calculate the inspection cost when 300 inspection hours are used and 30 batches are produced. Prepare a 90 percent confidence interval for this prediction.

Initially, Randy made his selections based on his own judgment using his experience and input from employees who perform the activities. Later, he used regression analysis to confirm his judgment. Randy prefers to use one driver per activity, provided that an R2 of at least 80 percent can be produced. Otherwise, multiple drivers will be used, based on evidence provided by multiple regression analysis. For example, the activity of inspecting finished goods produced an R2 of less than 80 percent for any single activity driver. Randy believes, however, that a satisfactory cost formula can be developed using two activity drivers: the number of batches and the number of inspection hours. Data collected for a 14-month period are as follows:

Required:

1. Calculate the cost formula for inspection costs using the two drivers, inspection hours and number of batches. Are both activity drivers useful? What does the R2 indicate about the formula?

2. Using the formula developed in Requirement 1, calculate the inspection cost when 300 inspection hours are used and 30 batches are produced. Prepare a 90 percent confidence interval for this prediction.

## Answer to relevant Questions

Dohini Manufacturing Company had the following 12 months of data on purchasing cost and number of purchase orders. Required: 1. Determine the high point and the low point. 2. Calculate the variable rate for purchasing cost ...Dohini Manufacturing Company, using 12 months of data on purchasing cost and number of purchase orders, ran a regression equation that yielded the following information on the intercept, X variable 1, and standard error. ...What are the six steps that define the design of an activity-based costing system? Golding Bank is in the process of implementing an activity-based costing system. A copy of an interview with the manager of Golding’s Credit Card Department follows. QUESTION 1: How many employees are in your ...Boyle, Inc., makes two products, X and Y, that require allocation of indirect manufacturing costs. The following data were compiled by the accountant before making any allocations: The total cost of setting up manufacturing ...Post your question

0